My take on the Managed Service Provider business

I have been working for a year in a Managed Service Provider (MSP) in the Midwest. In addition to having had to read constantly on existing and new technologies from a water hose as a newbie to the industry, I have been looking for ways to help the company strategically. Below is my understanding of the industry so far, for those who are interested. Of course, the whole industry is a lot more complex than what I can describe. I am simplifying it so that one can get an overview of the industry

Stakeholders of the industry

Below are the three main stakeholders:

Technology Vendors

You must hear of these companies before. They are some of the biggest corporations in the world such as Microsoft, Amazon, Google, VMWare, Dell EMC, Oracle, etc…These companies operate at a ridiculously big scale and own proprietary technologies. Take for example Microsoft with Office365 or Oracle with SQL database. Players such as Azure or AWS also have vibrant marketplaces featuring third party services or solutions. In addition to the ability to offer a wide breadth of services and a low price thanks to their scale, these companies also have an army of marketing, sales, engineers and engineer staff, an important factor in closing deals.

The technology vendors strive to be a one-stop shop for IT needs. The presentation of information on their websites is complex and usually requires time-consuming investigation. Their support plan can range from the basic free tier to a high-end tier worth $15,000 per month. So if you want customized services or personal touch, it comes at a cost.

It is not a surprise that these technology vendors often close deals with big corporations as customers. Who could compete with their scale, ability to discount, marketing prowess and a wide variety of services? Of course, it would be naïve to think that these companies want to ignore the rest of the market. With limited time in a day; however, it makes sense that they focus on landing lucrative deals with the likes of Fortune 500 or 1000 companies, instead of smaller deals with SMBs or startups.

MSP

Consider MSPs as an extended IT team that is not on your payroll. These entities invest in hardware, software and IT talent so that they can rent them out to companies in need for IT services or expertise. MSPs partner with technology vendors for technologies, of course, and as a reseller. The vendors need MSPs to help distribute their products to smaller markets and generate more revenue. Even though tech giants have a powerful marketing and sales team, it wouldn’t hurt to leverage MSPs to distribute their products more. Additionally, I have seen vendors refer small deals to MSPs because the deals are too small for the vendors to care about or waste valuable time on.

Lack of internal capabilities

The lack of internal capabilities can come from lack of staff or staff not having the right expertise. Take mainframe staff for instance. COBOL engineers are retiring and the young generations tend to prefer learning newer languages to the old COBOL. The lack of mainframe engineers makes it very difficult for corporations to maintain and manage mainframes. It’s understandable that such corporations will reach out to external vendors for help.

Another example is “AWS managed service”. Do a quick Google search with keyword “AWS managed service” and you’ll see that a lot of MSPs offer this service to help customers get onboard with AWS. Why do customers need this service?

Their internal staff doesn’t know how to do it

They don’t have enough staff to migrate data to AWS

Support and recommendations on migration are significant in a decision to move to the cloud. MSPs offer a far more customized and personal service than technology vendors do. This is why customers need MSPs. Additional benefits can include discounts from MSPs due to their high status with tech vendors.

Streamlined IT vendor management

You need different vendors for different technologies. Managing 3-4 vendors may be bearable, but as the number of vendors increases, it will be a hassle in terms of procurement and vendor communication. Working with an MSP can help streamline vendor management. CIOs or IT team can now talk to only one account manager, instead of 4 or 5.

Customers

These are companies that need IT services to solve business problems. They can be startups, SMBs or top tier corporations from various industries such as education, healthcare, financials, manufacturing or media, just to name a few. Under each industry, there are different segments. Take healthcare for instance. Under it, there are hospitals, healthcare insurers, genome sequencings, SaaS startups, etc…Each segment has different business problems leading to different IT needs.

What influences an IT outsourcing decision?

Technology

Obviously, a customer can only buy from vendors that offer what it is looking for. For instance, if a customer is looking to renew IBM software, it will only be interested in vendors that can offer the renewal licenses.

Prices

If a product or service is significantly out of reach financially for a company, it just won’t be able to use it, no matter how much trustworthy the seller is or how badly a technology is wanted. There is no way that a luxury car dealer can sell a Ferrari to me simply because I don’t have even close to enough capital to buy one.

Firstly, a price war is slippery slope that usually leads to losses for every seller. A private and small MSP can lower prices to a certain extent. Bills need to be paid. Staff needs to be compensated and nobody is in business to make losses. Second of all, many MSPs don’t publish prices for a variety of reasons, making it difficult for a buyer to know if the quoted prices are cheap or not.

Trust

After technology and prices, trust is the other influencing factor. Every business transaction involves trust. A business chooses an MSP because it trusts the MSP with IT and business problems. So what constitutes trust?

Branding

People buy from whom they know. It’s just what it is. If you want to buy a car, your propensity is to look at the known car dealers first. It’s the same in IT. Buyers look for vendors that they know from PR, search engines, webinars, newsletters or whatever medium is involved. Buyers also look at signals of quality such as awards or certifications. Granted, the more known a certification or aware is, the more difficult it is for an MSP to get. It usually involves a required level of revenue and customer testimonials. As a result, there is so much that an MSP can invest in branding.

Referrals

If an IT decision-maker is referred to a vendor by his close circle or business peers, that vendor will obviously see its chance of landing a business rise significantly. The implication is that MSPs have to deliver what they promise to every single customer, hoping that happy customers can bring in more businesses in the future.

Direct experience

Obviously, what can beat your own experience with a vendor? A $50,000 project can lay the trust foundation for bigger projects. So, if you have existing clients, hold on to them as long as possible!

How can an MSP compete?

If you look at technological offerings, prices and trust, big companies technology vendors mentioned above obviously have an edge over the rest. It is particularly more overwhelming in lucrative contracts. Who can compete with AWS for a $10 billion federal contract? Who can compete with them for contracts worth millions of dollars with Fortune 500 companies? Which MSP can compete with AWS for hosting contracts with the likes of Netflix or Spotify, which run global operations?

From my perspective, in addition to smaller referral deals from technology vendors, MSPs can generate revenue in the market for small and medium-sized businesses. That’s where personal touch and customized services carry much more weight. The key is that MSPs should not position themselves as a direct alternative to big technology giants. The narrative won’t be reliable and connecting with customers as it is virtually impossible for an MSP to be on the same level as AWS or Azure. By positioning themselves as a supporting cast that offers value-added services, MSPs can win deals in smaller markets and avoid going head-on with big technology behemoths.

Every MSP should know that and now, the question becomes: “how can one MSP compete against its peers in smaller markets?”. Let’s look at three main competitive strategies proposed by Porter

As mentioned above, cost leadership may work for a few select MSPs, but overall it is not a sustainable strategy for an average MSP. In terms of differentiation, since every MSP has arguably the same access to technology vendors through partnerships, the technical differentiations may not be significant. Unless one vendor can control a majority of engineers with special skillsets such as COBOL professionals, technical differentiation is almost out of question in the long run.

The other option is Focus. I believe that an MSP needs to be focused on a select segment where it can use its strengths the most. For survival and growth. By focusing on one particular segment with specific strengths, it will be much easier to sign clients in that segment. Once it establishes its credibility and trust, the snowballing effect will allow it to approach dominance in that segment. The dominance will offer the MSP the foundation financially needed to branch out to other markets. Remember the 80/20 rule? An MSP can get 80% of its clientele from its focus segments and 80% of its profit from the other 20% of its clientele, from other segments.

In summary, I believe that an MSP should adopt the Focus strategy to be competitive and to grow. Avoiding an “Us vs Them” narrative against the giant technology vendors is important. I hope that by now, I should give you a quick overview of the industry with my current understanding. Of course, it is more complex with a lot of nuances. I think it is an interesting industry worth studying with a lot of growth in the future as businesses rely more on IT to generate competitive advantages.